Pool dynamics

A pool is a smart contract that collects users’ deposits and facilitates users’ borrowings for a given asset.

Utilization ratio

Each asset available on Folks Finance has a specific liquidity pool where users can deposit and borrow the asset contained.

The pool's Utilisation Ratio $U$, is defined as the ratio between the total debt and the total liquidity:

$$U= \dfrac{TotalDebt}{TotalDeposits}$$

Where:

$$Total Debt=Total Variable Borrow Amount+Total Stable Borrow Amount$$

The protocol leverages $U$to maintain the pool balance among all deposits and borrows. Generally, if $U$carries a high value, the protocol will exhibit a low borrowing capacity, as well as a low redeem capacity. Therefore, the borrow interest rate, and consequently, the deposit interest rate both increase to disincentivize new loans and incentivize new deposits. So, when $U$tends to 1, the available capital becomes scarce, resulting in a possible problematic situation of unavailable funds for depositor’s withdrawal requests.

On the contrary, if $U$moves lower, the protocol, on that specific pool, will offer lower returns on deposited capital, so it must incentivize new loans. Therefore, the borrow interest rate and consequently the deposit interest rate will both decrease to incentivize new borrows and disincentivize further deposits.

Stable to total debt ratio

To maintain a healthy ratio of stable borrows to total borrows, the protocol introduces a new variable $Ratio$​ to monitor the weight of the stable borrows compared to the $TotalDebt$​ .

$$ratio= \frac{SBA}{TotalDebt}$$

When $Ratio$​ carries a high value, the protocol will charge an excess borrow interest rate for new stable borrows to disincentivize them.